Please explain what the social security surplus is and why is it important?

January 2001

Social Security’s Trillion Dollar Surplus

An annual "Social Security budget surplus" is created when Social Security receipts exceed the combined cost of providing benefits and administering the system. The yearly increase in 2000 for the Social Security Old-Age, Survivors, and Disability Insurance Trust Funds (OASDI), which accounts for the bulk of the system’s earnings and expenditures, was $153.3 billion (see Table, below). Each year the annual surplus (deficit) is added (subtracted) to the cumulative outstanding fund balance from the prior year. As the Table shows, the cumulative fund balance at the end of 2000 reached over $1 trillion.

The cumulative "surplus" funds are "primarily invested in interest-bearing obligations of the U.S. Government."1 Most of the assets held by the Social Security trust fund are "special public-debt obligations for purchase exclusively by the trust funds." The special Treasury issues are "redeemable at all times at par value," and they "pay an average market yield."2 Essentially, the Social Security surplus has been lent to the Treasury to fund other government expenditures.

The Trust Funds Are Growing!

Since 1982, the OASDI programs have generated an annual surplus. As Chart 1 shows, annual receipts (Social Security taxes plus interest earned) have exceeded annual expenditures, resulting in a net increase (annual surplus) that is added to the outstanding balance of trust fund assets. The sizeable annual increases in recent years have resulted in a sharp increase in the size of the OASDI Trust Fund, shown in Chart 2. As a result of the rapid growth of the fund, the cumulative surplus of the OASDI fund climbed to more $1 trillion in 2000.3

Chart 1

Chart 2

Why Is the Trust Fund Important?

The size of the trust fund is important because, in the decades ahead, demographic changes likely will cause the system to experience annual deficits. Thus, the $1 trillion-plus trust fund balance at yearend 2000 provides a cushion during periods when the trust fund might run annual deficits.

Changing demographic trends, like the planned retirement of the large baby boom generation, are expected to create a sharp increase in system expenditures in the decades ahead, while receipts languish as the number of workers falls relative to the number of retirees. Once expenditures exceed receipts (including interest), the trust funds must begin selling their U.S. Treasury bonds to offset the deficits. If those deficits continue, the annual deficits would eventually deplete the existing trust funds. Ultimately, without changes to the existing tax and benefit structure, most projections indicate that the annual deficits would eventually deplete the existing trust fund assets, and Social Security would be forced to begin borrowing to meet future obligations.

Let me suggest some additional reading materials that delve into the details of Social Security financing and reform, and a related issue of projecting budget surpluses:

The 2001 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. 2001. Social Security Administration, March 19, 2001. http://www.ssa.gov/OACT/TR/TR01/index.html

3. The 2001 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. 2001. Social Security Administration, March 19, 2001. Statistical data for OASDI for the Chart are from: http://www.ssa.gov/OACT/TR/TR01/tr_VIA.html#pgfId-111104